Dreaming of Leviathan oil

Gideon Tadmor, the man who introduced Yitzhak Tshuva to energy exploration, is optimistic he will find oil.

"Our next dream is oil," Delek Drilling LP (TASE: DEDR.L) chairman and Avner Oil and Gas LP (TASE: AVNR.L) CEO Gideon Tadmor told "Globes" in a special interview. The man who brought Delek Group Ltd. (TASE: DLEKG) controlling shareholder Yitzhak Tshuva to the natural gas exploration and discovery business, Tadmor explained that he is optimistic about the chances of finding oil at Leviathan, and why the Tamar pipeline will not solve Israel's gas shortage.

The hook-up of Tamar to the coast reminded Tadmor of the date of the gas field's discovery, which was also his 46th birthday. "On January 9, 2009, I entered Noble Energy Inc.'s (NYSE: NBL) offices and saw a line of long faces. The borehole had reached the target strata, but did not find gas," he reminisces. "I said, 'It can't be that we'd have a dry hole on my birthday! Just as I sat down, the dials began swinging wildly'."

The Tamar discovery should generate $39 billion in aggregate tax revenues ($8.2 billion royalties, $7.3 billion income tax, and $23.1 billion in Sheshinski taxes) for the state over the next 25 years, while generating $25 billion revenue for the entrepreneurs. Most of the money will come from the Taxation Oil and Gas Revenues Law, known as the Sheshinksi law, for the committee chaired by Prof. Eytan Sheshinksi appointed by then-Minister of Finance Yuval Steinitz.

"Globes": Former accountant general Shuki Oren claimed that Tshuva would not pay a cent to the government were it not for Steinitz's battle to tax the gas.

Tadmor: "I am astonished and regret Oren's remark. It's simply not true. Even before the Sheshinski Committee, we would have paid the state much higher taxes than other companies in the country, and Shuki knows them perfectly well. In general, I am not surprised that the Tamar's success has a lot of fathers, but I prefer that to failure."

Are you referring to geologist Yossi Langotsky, who has accused you of ingratitude and denying his contribution to the Tamar discovery?

"I recognize Langotsky's contribution to the industry, and for being one of the first people involved in the project. I regret that, as a result of a dispute with his partners, he found himself outside the project. Since Yossi is a real Israeli patriot, I am sure that the project's success is a source of pride for him as well."

Despite the celebrations marking Tamar's hook-up to the coast, it brings no good news to ordinary people. Electricity rates will not fall, and the cost of living remains unchanged. "The entry of gas greatly reduces the expected rise in electricity rates, and will save the economy NIS 13 billion a year," says Tadmor. "But it will take time until all the parties involved realize how dramatic the natural gas revolution is."

In your opinion, what should the government do with the money?

"We're the developers who created the pie called natural gas, and today most of this pie goes to the state. What to do with the money and how to maximize the effectiveness of the revenues - those are decisions by the government. I am sure that the new energy minister will know how to act to increase the pie."

The problems of the rich

Dr. Shlomi Prizat, former chief economist at the Israel Antitrust Authority, recently spoke about the success of Delek Group and Noble Energy Inc. (NYSE: NBL) in finding gas compared with the series of failures and disappointments for its rivals. Prizat said, "There is a strange phenomenon in this sector. There are entrepreneurs that succeed all the time and there are those that don't. How do you explain your series of successes? Maybe you just got hold of the best licenses?

"Luck is worth its weight in gold. But in order to take advantage of luck professionalism is a necessary prerequisite. Failure in gas exploration is part of the game and statistically it has to be that way. Professionalism reduces the number of failures in proportion to successes."

While continuing his work as chairman of Avner, Tadmor recently announced that he was setting up a private company for international operations in gas exploration in partnership with Tshuva's Delek Group. He said, "The company will begin operating in the coming days to exploit worldwide the unique reltative advantages that our management team has gained in oil and gas."

As part of his activities at Delek, Tadmor is currently involved mainly in developing the Leviathan reservoir. He warns against complacency and the mistaken impression that the flow of gas from Tamar has solved the shortage of natural gas in Israel for many years. "We expect that by 2016 we will reach a situation in which Tamar's capacity won't be able to fully supply demand for gas in Israel. Thus development of Leviathan is critical for the economy beyond the question of exporting gas from the prospect."

In terms of exports the deal with Woodside Petroleum Ltd. (ASX: WPL) is almost closed with 30% of the rights to Leviathan being sold to the Australian company for $1.5 billion. In recent weeks the possibility of exporting Leviathan gas by pipeline to Turkey has also been on the agenda. Energy sources believe that there is not enough gas in Leviathan for exports both through Turkey and Woodside's liquid natural gas (LNG) expertise.

Will you need to choose between Turkey and Woodside?

"These are the problems of the rich but we have a long way to go if at all before we choose between these options. The government has yet to decide if to adopt the Tzemach recommendations and allow exports. We are also waiting for the decision of the antitrust regulator regarding rights."

Why are you threatening not to develop the Leviathan field if the government doesn't approve the export of gas from the reservoir?

"There is no such threat. First of all as of today there is no legal restriction regarding the export of gas. Linking Leviathan to the Israel coast is a project with an overall investment of between $4 and $4.5 billion based on initial estimates and there is still no approved development plan for the field. If we succeeded in bringing financing for Tamar due to agreements with Israeli companies, in the case of Leviathan we must cope with large surpluses after Tamar. Something between $10 and $15 billion. Only a decision in favor of exports can provide a strong economic base for raising capital for this investment."

A deal with Turkey has a political aspect?

"I like to divide this up into stages. The discovery of the Yam Tethys field in 2000 brought Israel into the era of gas. The discovery of Tamar in 2009 brought Israel energy independence, and the discovery of Leviathan in 2010 will bring Israel into an era of exports. The gas from Leviathan can raise Israel's overall exports by 15% and together with this there are geo-political consequences on Israel's status in the Middle East. In this context, I want to point out that there are two gas consumers even closer than Turkey - Jordan and the Palestinian Authority - and when talking about cooperation then natural gas can be an absolutely very important tool in putting genuine content into this idea."

The last topic but certainly not any less important from Tadmor's point of view is the chances of finding oil in the Leviathan field. The latest forecast published by Noble Energy talks about a 25% average probability of finding two fields with 300 million barrels of oil in each one. Last year Noble halted the Leviathan 1 oil exploration drilling because the pressure was too high. The drilling is expected to recommence at the start of 2014 will a rig that specializes in deep drilling.

Are you more optimistic today about finding oil than you were before Leviathan 1 began drilling?

"Absolutely. We see that Noble has raised upwards their forecast after analyzing the major amount of data they gathered from Leviathan 1. After the gas discoveries development of the oil fields is certainly the next dream."